LAW FIRM DIRECTORY

Practice Areas |

Maryna ILCHUK,
Head of the energy and natural resources desk, Arzinger

Timur BONDARYEV ,
Managing partner, Arzinger

Energy development

The opening up of markets and introduction of transparent and competitive rules of the game make domestic energy more attractive. Implementation of new infrastructure projects and diversification of energy sources result in the arrival of internationally famous energy companies in Ukraine. At the same time, the guaranteed rate of return on projects in the field of renewable energy sources provides stable demand for “green” projects.

There are still active changes on the energy market related to the legislation reform, which Ukraine implements within the frameworks of obligations under the Third Energy Package and the Association Agreement with the EU. The purpose of such changes is to make the market open and transparent. It is worth noting that the Energy Strategy of Ukraine until 2035 was finally approved in 2017. The declaration of tasks and goals for the future already has fundamental importance because it provides understanding to market participants about what the direction of Ukrainian energy is and what projects will be developed.

 

ENERGY DEFINITION

As you know, modern-day Ukraine has a single buyer model, where the state acts as a binding link between energy producers and consumers. During implementation of reform we will move to a market of direct contracts, primarily to provide competition. In addition, the exchange, balancing market and ancillary services market will operate. There also will be traders, new players (by analogy with the gas market). We are currently working actively to adopt the necessary set of by-laws, including the development of codes to introduce a competitive market model.

The Agreement on the Ukrainian energy system joining ENTSO-E, the European Network of Transmission System Operators, was signed in 2017 to increase the investment appeal of the Ukrainian energy market. This was done to integrate our energy system into the European one so that Ukrainian players could go to Europe, and European ones could work in Ukraine under clear and transparent rules. It is worth noting the “Energy Bridge” Project, which in itself provides for the creation of an “energy hub” on the territory of Western Ukraine. Simultaneously, Ukraine will have funds to develop the 3rd and 4th units of the Khmelnytskyi Nuclear Power Plant. It is encouraging that there is already a consortium of international companies interested in implementing this ambitious infrastructure project.

In addition, a number of other investment attractive projects in the nuclear power industry are being developed, which, in particular, relate to the diversification of nuclear fuel supplies, fuel production and small modular reactors in Ukraine. The start of the project to build a centralized spent fuel storage facility for the world's best technologies and equipment to be supplied to ensure the safety of domestic nuclear power was an important event.

 

RENEWABLE ENERGY

Following the best global practices in terms of increasing the share of renewable energy in the country’s overall energy balance,  Ukraine continues to guarantee investors a unique project rate of return in the corresponding field. Ukrainian “green” tariffs retain their leading position on the international market, and the renewable energy sources market remains attractive and affordable for investors. Guaranteed income in euros (about 16 euro cents per 1 kW/h of solar power and up to 10 euro cents per 1 kW/h of wind power), regular payments to operators, access to appropriate land plots without tendering, obligations valid starting recently to conclude a Power purchase agreement (РРА) for 30 years, huge competition on the equipment manufacturers market who are ready to supply it on attractive financial terms – all these factors make the projects more interesting for investors and banks, which had previously not even dared to think about this sector. However, it is worth remembering that the law provides for a gradual tariff reduction, and the highest return will be provided to projects put into operation prior to 2019.

 

GAS SECTOR

Ukraine has not imported gas from Russia for several years. It actively develops gas import projects with its European neighbors, including infrastructure projects to expand export and import capacities at the border.

Ukraine set an ambitious goal to cover its gas needs through domestic production by 2020. However, it is necessary to make appropriate changes to legislation to stimulate gas production. For example, a draft bill on introduction of a single 12% rent for new wells has been pending review in Parliament for a long time. And in 2018 a regulation will come into force, according to which 5% of the rent will go to local budgets. It is expected that local councils will be more willing to negotiate permits for subsoil use on their territory as a result.

It is worth noting that within the framework of implementation of the goals set, the UkrGasVydobuvannya State Company has decided to intensify production at existing areas and enlist internationally famous service companies that would deliver new modern technologies to Ukraine. Thus, foreign companies in the field of gas production see new prospects on our market, and their interest has definitely been increased.

Another trend on the market is the constant increase in gas traders. Trading is mainly carried out in Slovakia, Poland and Hungary. The world industry leaders have already opened offices in Ukraine; therefore, they consider our market as a long-term and promising investment. However, there is still work to do. There is a need to balance the tariffs for entry and exit; moreover, the market has waited a long time for the promised daily balancing.

A separate issue of the gas market is the unbundling of state-owned energy company Naftogaz Ukrayiny. We have worked actively on this project, advised the relevant ministry analyzing possible models of separation and restructuring of the fuel and energy market in general, and represented this position in the Energy Community. The huge potential of Ukrainian GTS, the strategic location of Ukraine on the map and the powerful underground gas storage facilities are attractive to European companies. If formation of the structure is clear and proper, they see strong interest in joining the Ukrainian gas pipeline system as a partner to the management project.

 

TRENDS AND EXPECTATIONS

Stepping up the role of the Antimonopoly Committee of Ukraine on the electricity and gas markets is another trend of recent times. Thus, the AMCU delves into the energy-related issues and conducts investigations on these markets. Particular attention should be paid  to the state aid that was activated due to the relevant law that came into force, and in the energy sector even earlier, from the date of joining the Energy Community. Today, we observe the concerns of customers who understand that if state aid is deemed unacceptable it will have to be returned, even with penalties. Thus, each individual case of provision of assistance requires careful legal and economic analysis to avoid any negative consequences.

Talking about the energy sector, it is difficult to avoid the issue of asset privatization as there is significant interest among investors. But the existence of transparent contest rules and game rules on the market should be ensured to allow privatization leading to set goals, namely, to attain effective asset management and increase the attractiveness of companies.

There is movement of companies on the market; in particular, we support a number of projects in the field of mergers and acquisitions, purchase and sale of assets. In addition, the implementation of world corporate governance standards in energy companies definitely makes them stronger and more attractive assets. Time will tell whether Naftogaz Ukrayiny can achieve its ambitious plans and reach the IPO stage in 2020.

What will happen next to our gas pipeline system? Will Ukraine remain a transit state, or will the Nord Stream 2 gas pipeline project prevent it? We will see soon whether Ukraine proves its reliability and gives competitive advantages to its European partners, keeping in perspective the advantages of competitors and huge business interest in implementing this sensational project.

However, it can be safely said even now that the current situation in the energy sector provides a perfect time for implementing new business projects.